Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Kaiser aluminum first quarter 2020 earnings call. At this time all participants are in listen only mode. After the speakers presentation they'll be a question and answer session to ask the question during especially when you to press star one on your telephone if you require further systems. During the program. Please press star one zero.
I wouldn't like to do Celsius Conference call Miss Melinda Ellsworth you may begin.
Thank you good afternoon, everyone and welcome to Kaiser aluminum first quarter 2020 earnings Conference call. If you have not seen a copy of today's earnings release. Please visit the Investor Relations page on our website.
Kaiser aluminum dot com, we have also posted a PDF version of the slide presentation for this call.
Joining me on the call today, our Chief Executive Officer, and Chairman, Jack Hockema, President and Chief operating Officer keeps Harvey Senior Vice President and Chief Financial Officer, Neil less and Vice President and Chief Accounting Officer, Jennifer Hewitt.
Before we begin I'd like to refer you to the first three slice of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward looking statements are based on management's current expectations.
For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward looking statements. Please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on form 10-K for the full year ended December 31 2019.
And form 10-Q for the three months ended March 31 2020.
The company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the company's expectation.
In addition, we have included non-GAAP financial information in our discussion reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation.
Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we provided reconciliations in the appendix.
At the conclusion of the company's presentation, we will open the call for questions.
I would now like to turn the call over to Jack Hockema, Jeff.
Thanks, Phil Anda.
Hope everyone has a health and safety today welcome for joining us on the call.
While our comments would normally focus on our record first quarter results today, Keith Neil and I will focus on her preparedness and actions addressing the pandemic.
Turning to slide six adherents to our long standing business cycle strategy has prepared us well for unexpected economic adversity.
Execution of this strategy depends upon the strong preferred supplier position ability to quickly flex our variable costs strong liquidity and conservative leverage.
Liquidity and leverage or the most critical features of the business cycle strategy.
We focus on maintaining sufficient liquidity to fund, our tactical and strategic needs through a severe economic downturn in every board meeting we review our five year contingency liquidity plan, assuming a deep recession to ensure that as we make strategic investments we have sufficient liquidity to remain strong through the economic cycles.
Our guidelines for leverage are designed to provide financial flexibility and access to diverse sources of capital.
Turning to slide eight and the current situation the health and safety of our employees isn't continues to be our first priority.
We are classified as any central business, enabling all of our facilities to continue operations as they comply with social distancing and CDC guidelines, we have implemented steps to protect our employees and visitors to our sites and where possible our employees are working remotely.
Keith will provide additional color regarding our operations in our procedures to maintain a safety safe and healthy operating environment in our facilities.
With nearly $700 million liquidity that 8.7 times net debt leverage we're well positioned to navigate a recession without resorting to survival cost cutting measures that could compromised or ability to promptly respond to our customers needs when the economic recovery begins.
Turning to slide nine we've taken immediate actions to preserve liquidity. Our first action was to suspend share repurchases in mid March were flexing, our variable costs consistent with changing business activity within our cost of goods sold metal costs are 100% variable and more than two.
Two thirds of non metal costs are variable.
Also in April we'd be again, limiting capital spending to sustaining projects, which under normal circumstances, but average approximately $35 million per year.
However, with reduced activity level, there is less where on equipment and the level of sustaining capex will decline in line with the reduced activity level.
Any investments beyond sustaining projects must meet our standards for preserving a liquidity safety net and conservative leverage in February we announced a $375 million multiyear project at Trentwood and indicated that the timing would be subject to market conditions. We will continue to monitor market can.
Additions to decide the timing, including initial 145 million dollar investment in a new plate stretcher.
During the recession, there may be potential acquisition to consider.
We will adhere to the same disciplined approach as in the past employing the same filters, we apply to you and evaluating prior potential acquisitions must be a business that we understand and be compatible with our existing business must have a winning strategy and be capable of achieving a defensible competitive position.
One must have a transaction price consistent with creating long term shareholder value and importantly must meet our liquidity safety net and leverage guidelines.
Turning to slide 10, and demonstrated the underlying strength and potential of the business, we had record EBITDA and EBITDA margin in the first quarter following our record results in 2019.
Keith will provide a 2020 outlook on our commercial aerospace and military applications until there is more clarity surrounding the cobot 19 economy, we will suspend providing a full year 2020 outlook.
Now Keith and Neil will update you on the current situation and review the first quarter 2020 results Keith Thanks, Jack the health and safety of our employees always is our top priority. However, our focus has been amplified with the onset of the co that 19 virus. Our businesses are included in the critical.
All manufacturing sector defined by the U.S. Department of Homeland security and recognize as essential businesses by local and state authorities. We have continued to operate all of our facilities and have initiated a number of actions to best protect our employees and maintain a safe and healthier.
Yes.
We have implemented local state and federal recommendations to reduce the spread of the virus and all of our facilities and continue to monitor recommendations for further actions. We're also working closely with our employees and local unions to stress the importance of following CDC guidelines to mitigate the.
Risk of exposure to covert 19.
In addition, where possible our employees are working remotely until we return to normal operations and we have implemented additional health and safety protocols for all outside contractors and service providers required to enter our facilities.
A number of our employees have displayed symptoms and have been tested and others have been quarantine or self isolated since the pandemic began to date, we have had no employees test positive for coated 19.
Our employees and their families are concerned for their health jobs and financial security.
As we flux operations in response to changes in business conditions. We've also taken initiatives to support our furloughed employees.
We have revised our policies to provide any employee experiencing a job interruption 60 days of continued benefits with the company waving the premiums for the continued coverage.
Combined with the enhanced unemployment benefits provided by the cares Act, we expect our furloughed employees to receive unemployment compensation similar to their regular pay.
Moving to our markets and operations.
As Jack stated in his opening comments, we have long deep relationships with our blue chip customer base and we're working closely with all of them as we deal with the cobot 19 virus and its impact on our markets and the economy.
Let me speak to our key markets and current conditions as we see them presently.
Our large commercial aerospace segment represents approximately one third or more of our total value added revenue under normal circumstances.
Our large commercial airframe customers and their customers. The airlines have been significantly impacted by October 19, since late February as the airline travel has slowed dramatically.
While many of our commercial customers have curtailed operations on a temporary basis, we are working with them closely to meet their raw material needs now and as their operations ramp up.
At this time, we anticipate our value added revenue for commercial aerospace could be approximately 20% to 25% lower this year compared to 2019, reflecting the impact of mutually agreed upon modifications to existing contract declarations.
We continue to work in partnership with our customers to address all their needs.
We have solid multiyear contracts with these customers and longer term, we expect the full commitments reflected in the original contract declarations will be met in their entirety.
As we've seen through the history of commercial aerospace, we expect that overtime passenger traffic were cover and the subsequent growth in aircraft builds will continue.
Defense has been and continues to be an important part of our business, representing approximately 10% to 15% of our total value added revenue.
We enjoy a strong position on many legacy fighter programs in this market and most notably our significant supplier to the F 35 fighter program.
We experienced strong shipments for these programs in Q1.
And we expect demand to remain strong for the remainder of the year.
Moving to automotive.
Many of our customers have temporarily suspended operations due to covert 19, and we are adjusting our automotive operations consistent with these reduced activity levels.
We are in close communication with these customers and we'll have more information on our new product launches once our customers resume operations and redefine their needs for the remainder of the year.
While our general engineering shipments were steady through March.
Recent state and federal mandated shutdowns of all non essential businesses served by this end market has begun to have a negative impact on our current order rates.
Until these mandates are lifted and order rates improve we will continue to flex cost proportionately.
While continuing to support our service center customer relationships.
Just as important to our strategy and value system of being a preferred supplier to our customers. We are committed to being a preferred customer to our suppliers.
We maintained strong working relationships and remain current on all our payments to our suppliers. We've had no supply issues at any of our facilities and our suppliers continue to meet all our needs.
Finally, I'd like to thank all of our managers Union leaders and employees, who are working together with dedication and loyalty to provide essential services to our customers in a way that reflects the proud history of Kaiser aluminum.
I'll now turn it over to Neil to provide an update on our financial condition and a recap of our record first quarter results Neil Thanks Keith.
Turning to slide 15, as Jack discussed our business cycle strategy in planning process always includes a severe recession stress tests of our liquidity under a variety of scenario to focus on sufficient liquidity to fund our operations interest taxes regular dividends and both sustaining and strategic capital investments.
As of March 30, Onest, our balance sheet remains strong with a current net debt leverage 0.7, with approximately $346 million of cash and short term securities.
In addition, our $375 million revolving credit facility had approximately $342 million of borrowing availability for a total liquidity of $680 million as of quarter end.
As of March 30, Onest, our revolving credit facility was Undrawn and currently remain undrawn.
As a reminder, in November 2019, we replaced the previously existing revolving credit facility with a new 375 million dollar senior secured revolving credit facility with the maturity date of October 2024.
In addition, we issued $500 million of unsecured Ford Fiveeight senior notes with maturity date of March 2028.
Both our revolving credit facility and unsecured notes have covenants that allow us to operate our business with limited restriction and significant flexibility.
We currently do not anticipate any material change in our working capital requirements and our accounts receivables supported by our strong customer base.
In addition, we have ample credit lines with a highly rated hedge counterparties.
With financial strength and flexibility, we continue to address the pandemic economy, while also positioning for an economic rebound and potential opportunities that enhance our strong competitive position.
Turning to slide 16.
Value added revenue for the first quarter 2020 was approximately $217 million down approximately 1% compared to the first quarter 2019 on a 4% decline in shipments driven primarily by a plan exit of other non strategic application and lower automotive shipments as customers.
Again suspending operations late in the quarter.
Looking at our end market.
Value added revenue for our aerospace applications increased approximately 4% or $5 million from the first quarter 2019 on a 1% decrease in shipments reflecting favorable pricing in that and a strong aerospace mix.
Value added revenue for our automotive extrusion declined approximately 7% or $2 million from the prior year quarter on the 5% decrease in shipments.
The decline in shipments and related var reflect the impact of automotive customers temporarily suspending operations due to the cobot 19 pandemic.
Value added revenue in shipments for our general engineering applications was essentially flat with the first for 2019.
Value added revenue for other applications decreased approximately 71% or $5 million compared to the prior year quarter on 64% decrease in shipment, reflecting our planned exit from these non strategic applications.
EBITDA for the first quarter 2020 was a record $59 million, an increase of approximately $3 million or 6% compared to prior year first quarter.
EBITDA margin of first quarter 2020 was also a record of 27.4% compared to 25.7% in prior quarter.
The 170 basis point improvement was driven by 160 basis points due to favorable price mix and 10 basis points achieved from lower net cost.
Now turning to slide 17.
Consolidated operating income as reported for the first quarter 2020 was $46 million net income was $29 million and earnings per diluted share was $1.81 cents.
These results compare favorably to the reported operating income of $43 million net income of $28 million and earnings per diluted share $1.71 cents in a prior quarter.
Adjusted for noncash or nonrecurring items first quarter, adjusted operating income increased to $46 million compared to $44 million in a prior quarter.
Reflecting the items previously noted that drove the year over year improvement EBITDA. In addition to approximately $1 million of additional depreciation expense.
Adjusted net income for the first quarter was $30 million and adjusted earnings per diluted share was $1.90 cents.
Which is comparable to the adjusted net income of $30 million and adjusted earnings per diluted share of $1.85 cents no prior quarter.
Our effective tax rate for the quarter was approximately 25% compared to an effective tax rate of 26% in the prior year quarter.
We anticipate our 2020 full year blended federal and state effective tax rate will be in the mid 20% range.
In addition, as we continue to review the full impact of the cares Act, we anticipate we will be able to monetize our remaining aim fee credit for cash tax credit in 2020.
Capital investments in first quarter was approximately $21 million as we focus on preserving liquidity at this time, our capital spending will be limited the critical sustaining projects until we gain more clarity on the pulls pandemic economy.
During the first quarter, we returned approximately $24 million of cash to shareholders through dividends and share repurchases.
As noted previously by Jack in response to the current economic environment, we have suspended our share repurchase program and I'll turn the call back to Jack Jack.
Thanks Neil.
As Keith mentioned commercial aerospace applications represent one third of our approximately one third of our total value added revenue and demand is ultimately driven by air passenger travel.
Turning to slide 19 in the history of airline travel. The current crisis is one of many over the past 60 years in previous cases, despite the thought that maybe it's different this time travel returned to the long term growth trend within a short time after the crisis.
While this is a challenging time for the airlines, we expect that once again air travel will be restored to the long term growth trend after a period of adjustment.
Turning to slide 20, and the commercial airframe order backlog the industry has enjoyed a large and growing backlog since 2005.
Well, we don't often references that for decades prior to 2005, a much smaller backlog was normal.
While it's difficult to predict what orders and build rates will be during and after the pandemic. The current eight year backlog could decline more than 50% and still be inline with the long history prior to 2005.
We're often asked for perspective to be gained from the great recession, turning to slide 21, the graph illustrates annual shipments from 2005 to 2019 for each of our major market segments.
In 2009, our total shipments declined 23% from 2008 and it took two more years until 2011 to return to the prior peak.
Kaiser's aerospace and high strength shipments declined only 8% in 2009 from the prior year, while commercial airframe builds actually increased in 2009, the lower shipments were a result of supply chain destocking.
'cause, there's general engineering shipments declined 27% year over year in 2009, driven by weakening industrial demand and by reduced orders for armor plate as the Iraq War was winding down.
Industry demand was further impacted by de stocking in the long supply chain.
Our automotive extrusion shipments in 2009 declined 28% from prior year, driven by 32% decline and build rates.
And our shipments of highly cyclical non strategic applications declined 37% in 2009 during that period of time, our non strategic applications represented approximately 17% of our mix and have since declined to less than 1% of our current mix.
Another frequently asked question is how Kaiser is prepared today compared to 2009.
Turning to slide 22, while our mix of strategic applications is similar as I just mentioned the highly cyclical non strategic applications have essentially been eliminated from the current mix.
We ended 2009 recession began Kaiser was only two and a half years removed from along four and a half year corporate restructuring process today, Kaiser has greater liquidity and access to diverse sources of capital.
Our customer partnerships are also much stronger based on our long track record of excellent customer satisfaction and development of our highly differentiated Kaiser select products, which provide industry leading performance attributes.
While we were well prepared to navigate the great recession in 2009, we are even better position today.
Back then we successfully flexed our variable cost continued the regular dividend and proceeded with building our new Kalamazoo extrusion facility, a major strategic investment at the time that upon completion significantly enhanced our competitive strength.
As I noted earlier, we are taking similar initiatives today aggressively preserving liquidity to navigate the downturn, while positioning to be ready to address the challenges and opportunities of an economic recovery.
Turning to slide 23 in a summary of our remarks today, the health and safety of our employees is and continues to be our top priority as we confront the challenges presented by Cobot 19.
In the first quarter, we achieved record results continuing the momentum from our record 2019 results.
We have suspended our overall outlook for 2020 pending more clarity on cobot 19.
We are well prepared to address this economic adversity with a strong liquidity safetynet low debt leverage and access to capital and we are taking actions to navigate the recession and to be well positioned for the opportunities and challenges of an economic recovery.
We expect to have attractive investment opportunities beyond the sustaining projects and as always we will adhere to our guidelines for liquidity and leverage as we continue to evaluate all value creating investments we will now open the call for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone. If your question has been answered you were super soft from the Q. Please press the balance sheet.
Our first question comes from Curt Woodworth with credit Suisse.
Yes, Hey, Jack and everyone. How are you good morning.
Hi can you hear that no one tested positive for Covance.
On the aerospace outlook could you just spraying some of the parameters around the bar hoping down.
20% to 25%.
Given the start the year that would imply potentially down.
30 to 40 in the back half of the year and just kind of want to get a sense for.
What are you assuming for build rate are you, assuming any destocking and to that number as well. That's my first question.
Well, let me say first you didn't get 30 or 40% from US you got that somewhere else.
Because the only outlook, we gave was that our total aerospace and high strength would be down.
A single digits I believe for the year. So that was the only outlook that we gave.
Keith is talking specifically to just the commercial aerospace portion of the aerospace and I have strengthened I'll, let Keith elaborate on the the outlook.
Yes normally good morning, Kurt we up the large commercial aerospace is a large is the largest component of our total aero and high strength the total bar.
Value added revenue the other components.
We also look at our subs are in the regional Jets business Jets military applications and we also have a subset of the.
Which is included in industrial and those are generally in high strength structural components for auto and GE. So we have a lot of these products that go into other than the large commercial airframe. That's why we pulled out large commission commercial was because it's such a large segment and it's.
Heavily identified with Boeing and Airbus Airbus.
Right, sorry, I, Susan weren't more clear within the commercial you said that.
Can you provide any color in terms of the subs build rates that underlie just the commercial or we aspect of the guide. We're we're Keith and his team are are heavily engaged with our major strategic customers on it in this case on a day by day basis, we're always heavily engaged but things are.
Equally so this is based on conversations with our major customers and as he just said that's roughly one third actually a little slightly higher than one third of our total value added revenue and we expect based on extensive discussions with our customers that that value added revenue year over.
Here will be down roughly 20% to 25%.
Right, Okay, and then in terms of the.
Inventory situation can you talk too.
How you feel about that I mean, I recall from I think early 17 to mid to late 18, we went through this sort of likely destocking process, which I think at that time is very functional around the wide body build rate cuts and now. This is obviously much more pronounced do you have the.
Any sense of how the supply chain.
Sort of.
Handling awareness would you expect.
Significant destocking in the medium term.
Well, let me just restate, what we have said in the past and I'll, let Keith give additional color because again he is really close to all this.
We did say that there was de stocking in 17 and 18, we said at the time that we felt it was over done and in fact it was in that created to really really strong orders in the second half of the year because the supply chain got stretch way too thin.
So we felt we were pretty close to equilibrium or maybe even still thin coming into this year, but then I'll turn it over to Keith here, Yes, and so as Jack stated we are speaking daily and have been speaking daily with our with our customers in this area really since the beginning of the year some of our customers have experienced.
The things that they're working on Boeing for instance, on the 737 Max.
They are looking inside and remain focused to bring that that platform back online.
But what we've generally looked at this and we have included with them. We we've got mutual declarations as we've discussed and our outlook includes those discussions which also include what their needs may be their inventory.
Situation and also that Thats inclusive of our comments on our outlook.
Okay, and then just one last one on.
Capital spending and free cash flow can you quantify what the AMC credit could be and then.
How quickly.
Can you flex capital spending down any update on maybe what a good estimate for this year for Capex would be thank you very much.
Yes, so Neil in his comments said, we spent $21 million capex in the first quarter.
I said in my comments, we've said this for a long time that.
Thats sustaining capex is roughly 75% on the average of depreciation which bid we would be roughly $35 million a year or in this case, starting April one roughly $9 million per quarter and double underscore average on that basis, So and we could flex that capital spend.
Good quickly Keith has moved aggressively too.
Put a cap on capital spending the way I've characterized it when we're talking to investors is right. Now this is a battlefield. We're in a foxhole in this battlefields covered with smoke. So right now were hunkered down in our foxhole that we're waiting for the smoke to clear then we'll decide where we go but you can assume going forward, although there may be.
Some carryover from the first quarter that we should be operating at a nine me, let's say for the rest of year $27 million or less as we go forward for the rest of the year.
And then in regards to your question on the AOMT credit as we go through the cares Act we're now.
Looking at that to be in the area of $5 million to $10 million for this year.
Great I really appreciate it they will.
Okay. Thanks, Kurt.
Our next question comes from Josh Sullivan with the benchmark update.
Hi, good morning.
Hey, Josh.
Just expanding on the variable costs. There can you talk a little bit about.
Just what your flexing their outside of Capex anyway to help us understand the fixed cost to maybe utilization pieces that equation versus how much variable cost or flex you're able to execute in the model.
Well for the first time, you can mark this down as a historic day, because we've been asked several thousand times over the past few years about our variable cost, but we're going to put some clarity on that today. So what I said, what I said in the Premier prepared remarks is that when you look at cog. This the metal portion of Cogs as everyone knows is 100.
Present variable for us the non metal portion of Cogs, roughly actually more than two thirds of than the non metal portion of Cogs is variable and we can flex that pretty quickly theres always a tailwind you start to flick flex you're chasing the chasing volume down and then there's a tale of thing.
Like benefits and other costs Materialise on order those kinds of things, but but it should stabilize relatively quickly after a month or two if as soon as volume stabilizes. So we did it during 2009, we chased it down.
When we give the opposite effect when we start to get to the economic recovery, we start flexing back up again there'll be a tail. So we'll actually gets the benefit back when the economic recovery comes.
Got it really appreciate that.
And then just as far as the defense business are you seeing defense customers step into the void is there any pickup in ordering either to take advantage of the supply or just to support the industrial base.
Well.
Hi, Josh as Keith.
We are seeing a in a rise in defense orders of the programs that I mentioned earlier.
Continue unabated and goods strong outlook in front of those multi year continued growth being anticipated.
Theres all of US also a segment in hours with the munitions and other things that we tougher, but we are seeing that order rate pick up quite frankly since the beginning of the year I will say, it's not since the cobot 19, but at the beginning of the year, we're seeing a large pickup yes.
Okay.
That's right.
Monitor mobile market.
Yes.
And then it includes.
You're breaking up.
Yes, you're breaking up can you try to ask the question again, we didn't hear it.
Okay.
Okay.
Okay.
Well I wonder whether on what verticals you have to walk away from now.
No.
Okay and the parents Vincent.
Okay can you address.
Yes, I heard was preferred supplier.
Yes, we need to leave you need to lean out the window there Josh so.
And just stronger signal so we can hear the question.
Are you there we've lost.
[music].
It looks like his line disconnected.
Okay, We lost Josh Keith He was asking about preferred supplier you want to collaborate on that.
This has been a time, we've spent decades with our large customers. These close relationships, we've talked often about our our performance metrics our supply position are the performance of our products.
We were really seeing good strong dialogue with these customers on our outlook were considered strategic with all of our major customers and the dialogue has been continued even though a lot of that dialogue has been what Josh just tried to work with US These of the working from home so.
So I would say that were is close to these customers as they are they're seeing a lot of smoke on the battlefield as well and I think we're all working towards just as soon as we have clarity.
Being able to give a little better picture going forward.
And I'm not showing any further questions all mines at this time.
Okay, well, let me wrap up with a one final comment here.
Just for those view, who didnt follow all this I'll do a little bit of the Alger before for you. We didnt give an outlook here, but if you put together keys to outlook seek commented on the commercial aerospace and the military applications, which combined represent about 45% to 50% of our value.
Revenue and if you do the algebra on those that turns out to be roughly a 15% to 20% downturn in value added revenue year over year on roughly half of our business with the remaining half automotive in general industrial yet to be determined but that's the best outlook that we have now we think we're very well prepared for this but you know.
Never know at this could be a black swan event or severe black Swan. So we're just hunkered down as we said.
And waiting for the smoke to clear and we're ready to move as soon as a smoke clears. Thanks for joining us on the call today, and we look forward to updating everyone on our second quarter call in June and July. Thank you.
Ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.
Yeah.